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MUMBAI (Reuters) - Indian gold buying rose on Thursday after prices in the world's biggest consumer fell to their lowest in seven months, in line with the global market, and denting government plans to make the metal expensive by levying a higher import duty. Prices recovered later.
Alarmed by its record current account deficit, India moved to rein in gold imports -- second in value only to crude -- by raising its duty on the precious metal to 6 percent from 4 percent on January 21.
Despite this move, gold prices in India are falling in reflection of a sharp correction in the world market as signs that some Federal Reserve officials were reconsidering the scale and duration of the U.S. monetary stimulus programme spooked investors.
"From the consumer's point of view, what is important is the takeaway price. If that is going down, people will buy," said Daman Prakash Rathod, a director with Chennai-based wholesaler MNC Bullion.
After hitting a low of 29,263 rupees, its lowest level since July 20, the most active gold contract for April delivery on the Multi Commodity Exchange recovered and was trading down 0.15 percent at 29,535 rupees per 10 grams at 7.50 p.m.
Indian gold prices have fallen nearly 10 percent from a record high hit in November 2012.
Gold is considered a sign of wealth and good fortune, and is traditionally given at weddings and festivals in India.
International spot gold dropped on Thursday to $1,554.49, its lowest since July, before reversing course to stand up 0.2 percent at $1,565.06 by 0618 GMT. Wednesday's fall of 2.6 percent was its biggest daily drop in a year.
India's gold imports in January surged 23 percent from a year ago to their highest in 18 months as traders snapped up supplies ahead of the duty hike.
"Gold prices have stayed above the 30,000-rupee level for more than six months. Even then people were buying," said a Mumbai-based dealer with a private bank.
"Now, despite the higher duty, people are getting gold at lower prices. It is difficult to discourage demand."
Falling world prices complicate matters for the government, which could take more action in its budget for the fiscal year starting April 1. This is due to be unveiled on February 28.
"Increasing import duty is not a solution. If you raise duty, effectively you are raising the margin for people who are smuggling," said a Mumbai-based jeweller, who declined to be named.
In 2012, India's imports of 860 tonnes accounted for virtually all the demand of 864 tonnes -- down 11.25 percent from the year before, partly as a result of a previous tax hike.
The rupee, which plays an important role in determining the landed cost of the dollar-quoted yellow metal, fell on Thursday, limiting the losses in Indian gold prices.
Reporting by Rajendra Jadhav; Editing by Jo Winterbottom and Clarence Fernandez